Midway through the first day of Bitcoin hearings organized by the New York Department of Financial Services, department superintendent Benjamin Lawsky made his position clear. If the choice comes down to stopping virtual-currency money laundering -- which finances terrorism, narcotrafficking and rogue nations -- and enabling innovation in financial services, money laundering takes top priority.

"It's simply not worth it to society to allow all the things it facilitates to persist," versus allowing "a thousand flowers to bloom on the innovation side," Lawsky said.

Cameron and Tyler Winklevoss, founders of the Winklevoss Bitcoin Trust, an exchange-traded fund currently pending approval by the Securities and Exchange Commission, were among the witnesses testifying before a panel of regulators Tuesday. Cameron acknowledged that when he and his brother, who personally hold a substantial number of bitcoins and have made angel investments in Bitcoin startups, first entered the Bitcoin market, it was the Wild West. "The Wild West attracts cowboys," he said. "A sheriff is a good thing."

To that end, Cameron asked Lawsky and other members of NYDFS to provide clear regulatory guidelines for Bitcoin businesses, which are currently lacking. "Let us do what we do well," Cameron said -- namely, building the companies -- and "let investors do what they do well," which is performing due diligence on startups, without having to become regulatory experts themselves simply to stay on the right side of the law.

The brothers' testimony came just two days after the arrest of BitInstant CEO Charlie Shrem, who has been accused of participating in a money-laundering scheme tied to Silk Road. The Winklevosses were supporters of BitInstant, having led a $1.5 million seed round in the company in May. The brothers issued a statement saying they are "deeply concerned" about the arrest and will do all they can to help law enforcement.

NYDFS convened the hearings, which will continue Wednesday, to debate whether and how Bitcoin businesses, and virtual currencies themselves, should be regulated. One proposition on the table would require Bitcoin businesses to obtain a special license in order to operate.

Lawsky said he expects his office to put together a proposed regulatory framework for New York-based digital currency businesses some time this year.

But another witness, Fred Wilson, a partner at venture capital firm Union Square Ventures, objected to some of the proposed regulations. With Bitcoin, said Wilson, "We're trying to create a world where money can flow globally for free. You're talking about putting back into the system all the costs we're trying to take out of it."